Covid19 impact: Survival sutras for MSMEs

Coronavirus lockdown being extended up to May 3, 2020, is a good move in one way as it is stopping the spread of the deadly virus, but it is also becoming a challenge for the MSMEs.

MSMEs were able to disburse salaries for March 2020 as the lockdown had just started, but with the extension of it, the whole of April has been non-productive, with no sales and cash inflows into the system. The amount of outstanding dues to the MSMEs by large corporates and the government is quite large. At this hour of crisis, it would be great if the same is disbursed immediately, as it will provide some room for the MSMEs to pay the salaries to their employees and stay afloat.

Funding is a major challenge faced by most MSMEs, and they need to have a proper accounting system to manage funds efficiently. MSMEs shy away from the formal banking channel as it is a long, tedious, and sometimes excruciatingly time-consuming process. Banks check creditworthiness based on various documents and follow slow approval mechanism in most places.

According to industry reports, approximately 10 percent of all the MSMEs in India have access to formal credit through banks/NBFCs, and it is estimated that there is a gap of about Rs 19 lakh crore in credit demand and supply for MSMEs. This indicates there is a huge requirement of funds for MSMEs, and as of today, it is even more critical due to the global lockdown.

To address this challenge, the RBI has introduced the Trade Receivables Discounting System. It is based on Mexico’s NAFIN Cardenas, a similar model that is very successful there, and was implemented almost two decades ago.

Though the recent RBI monetary policy has relaxed the disbursal and approval, it is still a challenge as many of them do not have access to organised funding. To overcome this crisis, it is recommended for MSMEs to go for the TReDS route of financing as it is available immediately and without any credit history reference or working capital limits.

The process is very simple, and it can be achieved without any hassles. Some of the steps to be followed include:

1. The buyer and seller have to register on the online portal
2. The seller ships the goods and uploads the invoice on the portal
3. The buyer accepts the invoice
4. The invoice is now enabled on the platform for financiers to bid
5. The financiers view the invoice and they place bids
6. The seller views the bids from all the financiers
7. The seller chooses the financier who has the highest bid
8. The financier disburses the funds, and it is credited to the seller’s bank account
9. The seller can utilise the funds and need not follow up for payments
10. The buyer will pay the financier on the due date

In this process, the MSMEs need not wait for the due date to receive the funds or follow up with them from time to time. The major advantage with this method is that the seller is not responsible in case if there is a default by the buyer on the due date, unlike in bill discounting. In fact, bill discounting is part of the working capital limits.

Financing through the TReDS platform leverages the MSMEs to have funds at their disposal, and it will provide additional bargaining power while procuring as they can buy it on an immediate or cash basis at very competitive prices.

Over a period of time, this process ensures they migrate to the banking channel and get term loans for their machinery, expansion or upgradation and help them to accomplish their dreams.

The MSMEs can also explore alternative mechanisms for their sales like asking the buyers on the Letter of Credit basis, and they can discount these Letter of Credits with the banks. The banks will also discount the Letter of Credits as it is guaranteed funds and backed by another bank.

For doing all these, it would be worth it for the MSMEs to move their billing and procurement transactions recording through a cloud-based or mobile application as they are available at frugal pricing or, in some cases, free. The cloud-based or mobile-based solutions (Vyapari, Marg ERP, Sleek Bill, etc.,) also help the MSMEs to have real-time information and access the same from any location and reduce their dependency on the part-time accountants or their CA.

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